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digital option pricing
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Last edited by Doubtfin on February 15th, 2006, 11:00 pm, edited 1 time in total.
digital option pricing
P. Hagan has a paper on this somewhere in the forums. Let V(K) be the value of a call option at strike K. Then the digital option is replicated as close as one likes by (1/eps)[V(K-0.5*eps)-V(K+0.5*eps)] where eps is small, a few basis points. The smaller eps, the closer the call spread is to a digital.